AMD: Street Says GlobalFoundries ‘Divorce’ Encouraging

By Tiernan Ray

Street response has been trickling in to Advanced Micro Devices’s (AMD) announcement this morning that divested its remaining stake in its chip manufacturing partner, GlobalFoundries, and said it negotiated new terms for how much it will pay the latter for chips.

The agreements will result in a $703 million charge to AMD’s first quarter results, which are to be reported in full on April 19th, the company said.

The new agreement is for “negotiated wafer pricing,” instead of the prior arrangement whereby AMD paid GlobalFoundries for each “good die” produced by the latter.

AMD will pay GlobalFoundries $1.5 billion this year, up from $904 million last year, said CFO Thomas Seifert in a conference call this morning. The company said it’s outlook for gross margin remained unchanged.

Patrick Wong with Wells Fargo this morning writes that the conclusion of talks with GlobalFoundries is a positive for AMD: “We think it is good that AMD has managed to move to a wafer pricing agreement and still achieve reasonable profitability even with substandard yields in the near term.”

Wong, who has an Outperform rating on AMD and an $8 to $10 “valuation range,” thinks it’s “unfortunate” that AMD had to pay Global in cash, up front, but the good side of divesting from the supplier is that AMD has more options for where it can get its chips tabbed:

Possibly AMD will consider making some of its next generation APUs at Taiwan Semiconductor (TSM). However, the arrangement involves a cash payment of $425 million to Globalfoundries, to be paid over the next five quarters, and AMD will take a $703 million charge in the March 2012 quarter. We think it is unfortunate that AMD has had to make a cash payment to Globalfoundries, on top of the recently announced acquisition of SeaMicro which involves $281 million in cash. However, it appears that the original agreement which this new agreement replaces included a comparable cash payment, of $430 million, and so the ultimate impact on AMD’s balance sheet may be similar to what it would have been under the old agreement .

Wong cut his Q1 estimate to a loss of 82 cents a share from a prior 7-cent profit estimate, to account for the $703 million charge. As such, his 2012 full-year estimate goes to a loss of 35 cents from a prior 54-cent profit.

Oppenheimer & Co.’s Rick Schafer, who has a “Perform” rating on the shares, writes the deal is “a net-positive as the move to a take-or-pay wafer agreement, from good die pricing, positions AMD to better capitalize upon yield improvements throughout the year.”

Like Wong, he thinks, “The company can also now dual-source certain 28nm APU products from TSMC.”

And Stacy Rasgon with Bernstein Research reiterated an Outperform rating and a $10 price target, writing that it’s “like a divorce:” Perhaps the cash payment should be thought of as something like a divorce settlement – in return for payment AMD is shedding ownership, oversight, but also exclusivity requirements to GlobalFoundries.

ANd while the “cash outflow” of $425 million “is significant,” it is good that AMD has “bought” something in return for a payment for which it was already on the hook — namely, manufacturing flexibility.”

“The new WSA [wafer supply agreement] should help to calm some of the longer term concerns over AMD’s product roadmap and single-source dependency for 28nm process technology,” writes Rasgon.

AMD’s liquidity situation actually looks just fine, writes Rasgon:

While the company does have some cash outflow this year ($281M for SeaMicro, $250M for the new WSA settlement, and ~$500M in debt coming due in August), the company should be able to maintain cash reserves at an appropriate level. We see this as another example of how the company’s improved financial performance is allowing a degree of flexibility that would have been unheard of in prior years.

Rasgon left his estimates unchanged for this year.

AMD shares are down 33 cents, or 4.4%, at $7.12.

Copyright 2015 Dow Jones & Company, Inc. All Rights Reserved

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our
Subscriber Agreement
and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit